| at-the money option: |
An option whose strike price equals, or is
approximately equal to, the current market price of the underlying
futures contract. |
| basis: |
the difference between the price of a
commodity and the price of a related futures contract, i.e., cash price
futures price = basis |
| call option: |
an option that gives the option buyer the
right to buy (go "long") the underlying futures contract at
the strike price on or before the expiration date of the option. |
| cash market: |
a market in which physical commodities are
bought and sold. |
| cash price: |
the price of an ingredient through a
particular supplier. |
| Clearing Corporation: |
the organization that clears Chicago Board of
Trade futures and futures options trading activity to make sure
buyers’ and sellers’ records agree and that contracts are honored. |
| commission: |
fees paid to a broker for executing a futures
or options order. |
| correlation: |
the causal relationship between changes in
the value of the futures contract and changes in the value of the hedged
item. |
| cross-hedge: |
a hedge initiated to cover price risk in one
commodity using a different but related futures contract when there is
no futures contract available for the item being hedged (e.g., hedging
wheat flour with wheat futures). |
| exercise: |
the action taken by the holder of a call if
he or she wishes to purchase the underlying futures contract or by the
holder of a put if he or she wishes to sell the underlying futures
contacts. |
| expiration date: |
the last day an option can be exercised.
Options expire during the month proceeding the futures contract delivery
month. For example, March wheat options expire in February. |
| forward contract: |
a cash market agreement in which a seller
agrees to deliver a specific cash commodity to a buyer sometime in the
future at a predetermined price. Also referred to as a long-term
purchase agreement. |
| futures contact: |
a contract traded on a futures exchange for
the delivery of a specified commodity at a future time. The contract
specifies the item to be delivered and the terms and conditions of
delivery. |
| futures market: |
a market in which futures contracts are
bought and sold. |
| futures price: |
the price of a specific futures contract. |
| hedge: |
buying or selling a futures or options
contract for protection against the possibility of a price change in the
physical commodity or ingredient one is planing on buying or selling. |
| hedger: |
a market participant who buys or sells a
futures or options contract for protection against the possibility of a
price change in the physical commodity or ingredient. |
| in-the-money option: |
a call is in the money if its strike price is
below the current price of the underlying futures contract (i.e., if the
option has intrinsic value). A put is in the money if its strike price
is above the current price of the underlying futures contract (i.e., if
the option has intrinsic value). |
| intrinsic value: |
the dollar amount that would be realized if
the option were to be exercise immediately. See in-the-money option. |
| long: |
buying a futures or options contract. |
| long hedge: |
buying a futures or options contract to
protect the purchase price of a commodity or ingredient one is planning
to purchase. |
| long-term purchase agreement: |
a cash market agreement in which a seller
agrees to deliver a specific cash commodity to a buyer sometime in the
future at a predetermined price. Also referred to as a forward contract. |
| margin: |
in the futures and futures/options markets,
this is an amount of money deposited to ensure fulfillment of the
contract at a future date. Both buyers and sellers of a futures contract
must initiate and maintain a margin account. Only sellers of options are
required to initiate and maintain a margin account. Option buyers do not
have margin requirements. |
| offset: |
taking a second market position opposite to
the initial position (also referred to as close out). |
| option: |
within the futures industry, this is a
contract that conveys the right, but not the obligation, to buy or sell
a futures contract at a certain price for a limited time. See call
option and put option. |
| out-of-the money option: |
a call or put option that currently has no
intrinsic value. That is, a call whose strike price is above the current
futures price or a put whose strike price is below the current futures
price. |
| premium: |
the price of a particular option contract as
determined by option buyers and sellers at a futures exchange. Premium
does not include related brokerage commission fees. The premium is the
maximum cost (loss) an option buyer may be subject to. |
| put option: |
an option that gives the option buyer the
right to sell (go "short") the underlying futures contract at
the strike price on or before the expiration date of the option. |
| short: |
selling a futures or options contract. |
| short hedge: |
selling a futures or options contract to
protect the value of a commodity or ingredient one currently owns. |
| spot cash price: |
the current ingredient price quoted by your
supplier. |
| strengthen: |
refers to basis movement where the price of a
cash commodity increases relative to the price of a specific futures
contract. A long hedger does not benefit from a strengthening basis. A
short hedger benefits from a strengthening basis. |
| strike price: |
the price at which the holder of a call (put)
may choose to exercise his or her right to purchase (sell) the
underlying futures contract. |
| time value: |
the amount by which an option’s premium
exceeds the option’s intrinsic value. If the option has no intrinsic
value, its premium is composed entirely of time value. |
| transaction costs: |
commission fee and opportunity cost of margin
capital. |
| underlying futures contract: |
the specific futures contract that may be
bought or sold by the exercise of an option. |
| weaken: |
refers to basis movement where the price for
a cash commodity declines relative to the price of a specific futures
contracts. A long hedger benefits from a weakening basis. A short hedger
does not benefit from a weakening basis. |
